This article has been researched and written by Scott Cairns and the team at Creation Business Consultants. AI has not been used in generating this article.
The UAE has introduced a Corporate Tax, effective from 1, June 2023. This article expands on the UAE Corporate Tax Rates applicable to Qualifying Free Zone persons, highlighting the details involved in determining the tax rates for businesses located in Designated Free Zones.
UNDERSTANDING UAE CORPORATE TAX RATES
The Corporate Tax Law stipulates specific rates for Qualifying Free Zone persons:
- 0% on Qualifying Income.
- 9% on Taxable Income that is considered not Qualifying Income as mentioned (as per article 18 paragraph 1b of the Corporate Tax law).
To determine the applicable Corporate Tax Rate for Persons located in Designated Free Zones, we will elaborate on the following topics below:
- Qualifying Free Zone Person.
- Qualifying Income from a Qualifying Free Zone.
- Qualifying activities.
- Applicable Corporate Tax Rate for goods distribution in designated Free Zones.
WHAT IS A QUALIFYING FREE ZONE PERSON?
The description of a Qualifying Free Zone Person is important in the context of the Corporate Tax Law in the UAE. We outline the key conditions that must be satisfied to be recognized as a Qualifying Free Zone Person.
WHAT ARE THE CONDITIONS FOR QUALIFYING FREE ZONE PERSON?
The conditions for a qualifying free zone persons include but are not limited to:
1. Adequate Substance
- Definition: A Qualifying Free Zone Person should display a substantial presence.
- Significance: The entity must have sufficient substance to be eligible for recognition under UAE Corporate Tax Law.
2. Generation of Qualifying Income
- Requirement: A Qualifying Free Zone Person must generate income that will fall under the definition of Qualifying Income.
- Importance: Identifying and documenting sources of Qualifying Income is vital for compliance and tax optimization.
3. Non-Election for 9% Corporate Tax Rate
- Condition: The Qualifying Free Zone Person must not elect to be subject to the 9% Corporate Tax Rate.
- Implication: Understanding and sticking to this condition is vital for remaining eligible for favourable tax rates.
4. Arm’s Length Transactions and Transfer Pricing Documentation
- Standard: Transactions with related entities must be managed at Arm’s length.
- Documentation: Maintenance of a master file and local file for Transfer Pricing purposes is compulsory.
- Significance: Safeguarding compliance with transfer pricing rules is essential for the Qualifying Free Zone Person.
WHAT IS QUALIFYING INCOME FROM A QUALIFYING FREE ZONE?
Understanding Qualifying Income is paramount for entities operating within Qualifying Free Zones in the UAE. Below we explore the conditions outlined in Article 3 of Cabinet Decision No. 55 of 2023, which sets out the nature of income eligible for consideration as Qualifying Income.
QUALIFYING INCOME CRITERIA:
1. Income from Free Zone Transactions
- Definition: Qualifying Income includes revenue generated from transactions with other Free Zones.
- Exception: Excluded Activities are ruled out from this category.
2. Income from Non-Free Zone Transactions
- Specification: Qualifying Income might be from transactions with non-Free Zone Persons.
- Condition: This would apply particularly to Qualifying Activities that do not fall under the category of Excluded Activities.
3. Other Income with De Minimis Compliance
- Inclusion: Any additional income qualifies as Qualifying Income if the Qualifying Free Zone Person meets the de minimis requirements.
- Significance: Meeting the de minimis requirements guarantees the inclusion of diverse income streams under the Qualifying Income umbrella.
WHAT ARE THE QUALIFYING ACTIVITIES RELATED TO INCOME DERIVED FROM TRANSACTIONS WITH A NON-FREE ZONE?
Understanding the details of Qualifying Activities is key for those entities operating within Designated Free Zones in the UAE. We explore the Qualifying Activities linked to income derived from transactions with non-Free Zones and address recent developments in legislation and public consultations.
EXPLORING QUALIFYING ACTIVITIES:
1. Distribution of Goods or Materials
- Definition: Under Article 2, Paragraph 1k of Ministerial Decision No. 139 of 2023, Qualifying Activities involve the distribution of goods or materials from a Designated Zone to a customer engaged in resale, processing, or alteration of such goods for sale and resale.
- Location Requirement: To benefit from the 0% Corporate Tax Rate, a trading entity must be situated in a designated Free Zone, such as Jebel Ali Free Zone Authority.
2. Clarifications on Import/Export Requirements
- Previous Ambiguity: This section does not clearly state whether goods or materials are to be physically imported into and exported from the UAE to qualify as Qualifying Activities.
- Developments: August 2023, the Ministry of Finance issued a public consultation document detailing actual importing and exporting may not be a prerequisite for Qualifying Activities. This insight, while not legally binding, provides valuable guidance on the Ministry’s perspective.
LEGISLATIVE CHANGES:
3. Cabinet Decision No. 100 of 2023:
- Update: A new Cabinet Decision has replaced No. 55, and a new Ministerial Decision No. 265 of 2023 regarding Qualifying Activities.
- Lack of Clarity: Regardless of these changes, the recent updates do not clearly mention the explanation provided in the public consultation about the import/export requirement for Qualifying Activities.
EXPECTATIONS & TAKEAWAY
The landscape around Qualifying Activities and the related Corporate Tax Rate is dynamic. Entities in Designated Free Zones are yet to receive further guidance from the authorities to gain transparency on if the physical import/export of goods is a requirement for qualifying for the 0% Corporate Tax Rate. We anticipate additional insights from the authorities to navigate the evolving regulatory environment effectively.
Creation Business Consultants Tax department is ready to help you ascertain the Corporate Tax Rate for entities situated in a UAE Free Zone and engaged in international trade outside the UAE. For free consultation or inquiries contact us either via email at [email protected] or by phone at +971 4 8786240 today.
